The disparity in valuation between Indian and US equities has reached its most pronounced extent in 17 years, with the Nifty 50 now trading approximately 20-25% below the S&P 500.
As US stocks experience a meteoric rise fueled by optimism surrounding artificial intelligence, Indian earnings remain in a phase of consolidation.
This has led investors to ponder whether this rare discount offers an opportunity to invest in India at a bargain or signifies a potential deceleration in near-term growth.
Below are six pivotal insights from analysts and strategists regarding the factors driving this divergence, its implications for investors, and the likelihood of a reconciliation of the gap.
1. The most significant valuation gap in nearly two decades
As of early November 2025, the S&P 500’s price-to-earnings (P/E) ratio stands between 28x and 30x, while the Nifty 50 is trading near 22x. This positions Indian equities at a remarkable 20-25% discount—an unprecedented difference since 2008.
Naren Agarwal, CEO of Wealth1, stated, “The gap stems predominantly from the rapid expansion of U.S. multiples, rather than an outright devaluation in India.”
He elaborated that, based on trailing P/E metrics, the S&P 500 is hovering in the high 20s while the Nifty 50 rests in the low 20s—creating a significant discount near a 17-year historical extreme.
Agarwal attributed this divergence to the “U.S. AI mega-cap surge,” while India’s earnings cycle begins its ascent following a subdued FY25.
2. AI surge propelling U.S. valuations; Indian earnings lagging
Traditionally, Indian equities have commanded a premium over the U.S. market. Hitesh Jain, a strategist at YES Securities, noted, “Historically, plotting the spread between the S&P 500 and Nifty 50 based on trailing P/E yields a positive average of 0.8 or 1, indicating that Indian markets typically enjoyed a higher P/E than the S&P 500.”
However, recent changes have occurred. Jain observed that the U.S. benefits from a robust catalyst in AI, with the so-called ‘Magnificent Seven’ companies generating impressive earnings and cash flows, allowing them to command elevated valuations.
Conversely, Indian equities face headwinds from a succession of disappointing earnings reports over the past six quarters, although this gap presents a viable buying opportunity for long-term investors.
3. FII dynamics exacerbating the gap
Foreign institutional investors have been notable sellers throughout the year, contributing to the decline in valuations, even as domestic investments surged.
Agarwal highlighted that FPIs were net sellers for much of 2025, withdrawing roughly $16-17 billion by early November, while domestic mutual funds mitigated this by absorbing the outflows with record inflows.
“FIIs have significantly widened the valuation discount by withdrawing close to Rs 1.27 lakh crore from Indian markets in FY25,” stated Abhinav Tiwari, a research analyst at Bonanza.
“Yet, this outflow has been somewhat counterbalanced by a dramatic increase in Domestic Institutional Investor (DII) participation.”
Harshal Dasani, head of INVasset PMS, noted that while foreign investors have influenced short-term valuations and volatility, they have not undermined the long-term foundational strength of India’s market.
Despite over Rs 1.9 lakh crore in FPI outflows, domestic mutual fund inflows of Rs 28,000-30,000 crore monthly have sustained elevated valuations.
4. Divergent outlooks: opportunity versus caution
Expert opinions vary on whether the widening gap signals an alarming trend or an opportunity for investment. Agarwal posits that the situation leans more towards opportunity rather than threat, citing improved financial conditions and early indicators of an earnings revival.
He emphasized that historically, periods when India trades at a discount to the U.S. have often reverted to the mean as earnings visibility improves.
Hitesh Jain echoed this sentiment, asserting that the current discount presents a “superb investment opportunity for long-term stakeholders in India.”
He observed that after a correction commencing in September 2024, valuations for many stocks have adjusted favorably following six quarters of consolidation, particularly in the mid and small-cap sectors.
Jain pointed to sectors like consumption, discretionary spending, and financials as ripe for opportunity. Once consumption begins to climb, it will naturally translate into earnings growth, as market valuations are intrinsically linked to earnings.
Conversely, Dasani cautioned that India’s elevated premium carries a dual message. While it reflects confidence in long-term growth, it simultaneously signals against chasing momentum or acquiring assets at inflated multiples without appropriate earnings backing.
Tiwari suggested that the existing discount is shaped by both “structural and cyclical influences.” He noted that approximately half of the gap is cyclical, with moderation in GDP growth expected to hover around 6.3-6.5% in FY26, compounded by poor corporate earnings and international trade tensions affecting valuations.
5. Potential catalysts for gap fluctuation
Analysts are identifying various potential catalysts that could either narrow or exacerbate the valuation gap. Agarwal indicated that “continued Nifty EPS upgrades leading into FY26, stabilization or reversal of FPI flows, and a loosening of domestic financial conditions post-RBI cuts” could play pivotal roles.
Dasani concurred that while the valuation premium may remain elevated, it is likely to be range-bound with the potential for tactical compression should global growth rebound or emerging market flows shift.
He noted that the next market rally segments will rely more on the quality of earnings, policy execution, and disciplined capital allocation rather than merely expanding multiples.
Jain from YES Securities remarked that Q2 FY26 has shown signs of revitalization, asserting that a rebound in consumption will reflect positively on earnings growth, emphasizing that market valuations are inherently a reflection of earnings dynamics.
Tiwari also highlighted that the AI narrative will critically influence future trends, warning that a deceleration in AI adoption or monetization could lead to a reassessment of U.S. valuations, ultimately affecting the India-U.S. valuation gap.
6. Navigating opportunities and risks
Despite the prevailing divergence, experts emphasize selective opportunities for investment. Jain pointed out that sectors such as consumption, discretionary spending, and financial services remain appealing for long-term investors
Dasani mentioned that “large banks and select NBFCs are trading in line with long-term averages and stand to gain from liquidity easing,” while “overvalued capital goods and speculative small-caps might be at risk if market sentiment softens.”
Agarwal concluded by stating that private banks, industrials, and utilities present attractive investment options given their combination of valuation and growth potential, whereas “richly priced capital goods and the small/micro-cap segments might encounter challenges moving forward.”
Source link: M.economictimes.com.
